Rating Agencies Assess Credit Impact of Sandy

WASHINGTON  Local governments on the East Coast hit hardest by Hurricane Sandy could face downward pressure on their credits if they have significant unbudgeted costs for cleanup that are not covered by insurance or various kinds of aid, Moodys Investors Service said in a report issued Thursday.

But such downgrades would be rare and only in extreme cases, according to the rating agency.

U.S. municipal issuers have an extremely strong track record of recovering from natural disasters [such as Hurricanes Isaac and Irene] without impairments to bondholders, the report said.

The immediate disruptions of these disasters tend to cause short-term liquidity problems, Moodys said, but subsequent spending from insurance, federal aid, state support and private charitable donations is very stimulative for local and regional economies.

The Moodys report followed one published Wednesday by Standard & Poors.

In that report, Standard & Poors said it does not expect to see deterioration in investment-grade credits if there are short-term service interruptions and issuers have business interruption insurance or are eligible for Federal Emergency Management Agency reimbursements.

However, Standard & Poors said it is monitoring credits that have been affected by Hurricane Sandy and could revise its views.

If the revenue-generating capacity of an issuer or borrower is materially impaired for an extended period, credit quality could be pressured, the rating agency said.

Moodys said the most vulnerable kinds of debt include: sales and special tax revenue bonds, revenue bonds supported by operations of health care, educational, housing or other enterprise entities, and issuers of other revenue bonds.

Standard & Poors said it is monitoring some of the largest borrowers of debt most affected by the storm, including some of the transportation, turnpike, port, and water and sewer authorities in New Jersey, New York, Pennsylvania and the District of Columbia.

Fitch Ratings, which had offices hard hit by Hurricane Sandy in the financial district, has not yet issued a report, said Amy Laskey, a managing director.

We would be looking at the governments that were relatively less prepared, that had lower levels of liquidity and less robust contingency plans, Laskey, whose expertise is local government credits, said in an interview.

Our concern would be if there was an evacuation and that area wasnt repopulated, she said. Most of the local governments hit by the hurricane have contingency reserves for weather events and will also be eligible for aid from FEMA, according to Moodys.

For disaster areas, the federal government pays 75% or more of emergency costs and up to 75% for hazard mitigation projects, it said.

President Obama has already authorized emergency funding for New Jersey, New York, Pennsylvania, Massachusetts, Rhode Island, Connecticut, Maryland, Delaware, West Virginia and the District of Columbia, Moodys said.

States sometimes help local governments bridge any gaps in cash flows if there are delays in federal reimbursements, the rating agency noted.

In the wake of Hurricane Irene, for example, Vermont accelerated local aid and allowed local banks to borrow from the states Municipal Bond Bank to fund short-term loans for municipalities for clean-up costs.But Moodys said there can be some risks to credits.

Those risks include: upfront cleanup costs that exceed budgeted contingencies; a lag in aid from state or federal governments; and delays in insurance reimbursements.

Hospitals in hard-hit areas also may suffer from a significant decline of patients or the closures of outpatient clinics and doctors offices. In addition, there could be expenses for overtime staffing of emergency workers and the costs of cleanup, Moodys said.

Insurance may cover a lot of the costs associated with storm-related damage, but is unlikely to cover all of what will likely be higher expenses for the period, the rating agency said.